Fannie and Freddie Float Principal Forgiveness for Some Borrowers

Credit union trade organizations say they are still reviewing the details regarding a plan from Fannie Mae and Freddie Mac that would allow principal forgiveness for underwater borrowers on the difference between their property’s value and mortgage balance.

According to a report Monday from Bloomberg, current borrowers who can prove they have a valid need to move – to take a new job or deal with a serious illness, for example – would become eligible in March to apply for a deed-in-lieu transaction that would eliminate the loan’s underwater balance so the homeowners could sell their properties. The program would require a 55% debt-to-income ratio.

NAFCU President/CEO Fred Becker said his trade group will evaluate the impact the action would have on credit unions, with a special focus on whether the action would precipitate strategic defaults.

“We have discussed with the FHFA and FHA the hazards of principal reduction and forgiveness, and have had success as the FHA has committed to addressing their policy regarding eligibility of borrowers whose homes have been foreclosed upon and the FHFA rejected instituting a principal forgiveness program,” Becker said.

“However, in light of the reported Fannie and Freddie actions, we will re-evaluate the issue to ensure it does not incentivize bad behavior,” he said.

CUNA Deputy General Counsel Mary Dunn said Fannie and Freddie have historically been slow to help struggling borrowers, so in theory, the move is “probably a good thing.” However, she added that any positive benefits to borrowers would be weighed against additional regulatory burden or disadvantages the program may present for lenders.